A Rose By Any Other Name Would Smell As Sweet, But Still May Not Be Insider Trading

Over at Dealbook, Peter J. Henning offers two recent insider trading cases filed by the Securities and Exchange Commission to describe the malleable contours of insider trading, which is to say that insider trading isn’t defined by federal statute, but rather by how far the SEC can convince the courts to go along in defining the concept.

In one case, the government charged Manouchehr Moshayedi, the CEO of a California-based computer storage device outfit called STEC for failing to disclose negative information about the company before selling shares in a secondary offering. To wit: the SEC alleges that Mr. Moshayedi entered into a side deal with a customer to sell more product than the company needed, thus boosting STEC’s revenue—and share price with it—ahead of Mr. Moshayedi’s stock sale. That sounds more like fraud to Mr. Henning and less like “converting corporate information for personal gain.” Which is about the same place Matt Levine came out at when he wrote about the case last week.

(Mr. Levine’s supposition on the government’s motive: “If every time someone fails to tell you something about what they’re peddling, you call it “insider trading,” then insider trading is in fact the main problem with financial markets, and the regulators are doing a good job by focusing on it.”)

Mr. Henning’s also notes the government’s case against Ladislav Schvacho, who’s alleged to have notched a neat $500,000 profit trading the stock of a staffing company called Comsys after learning that the company was about to be acquired. Mr. Schvacho’s source of information? His friend Larry L. Enterline, who at the time was Comsys’ CEO. There’s a question of precedent here, and we’ll let Mr. Henning deal with it:

In United States v. Chestman, the United States Court of Appeals for the Second Circuit rejected a marital relationship as sufficient for insider trading liability when a husband learned of an impending deal from his wife. Whether the personal friendship between Mr. Schvacho and Mr. Enterline is enough for an insider trading violation is certainly questionable, although the case was filed in Georgia (which is in the 11th Circuit), so the Chestman decision is not directly controlling.

Which in turn reminded us of our less learned reaction to the SEC’s complaint against Mr. Svchacho when we read it last week: That the government’s description of the friendship between the pair sounded a little euphemistic.

Well, the point is that the SEC appears to be pushing on the definition of insider trading, and whether that’s because it’s running out of traditional cases to try, or wants to expand its bailiwick, or as in Mr. Levine’s fun but too good/conspiratorial-to-be-true conception, is aiming at improving the government’s reputation for policing financial crime, we’re not in position to say. But it’s interesting ponder, and in any case (and maybe we’re feeling a little punchy) we’re still tickled by the government’s “good friend” press release.